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Rising salaries drives Chinese firms west

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A growing number of companies are moving to China's western or central areas because of rapidly rising labor costs elsewhere, according to a report released by Aon Hewitt, a global human capital consulting company.

Average salaries covering all major industries in China rose 8.4 percent in 2010, up 2.6 percentage points from a year earlier, according to the research.

"For this year, we forecast the country's overall salary increase rate will reach 9.1 percent," Peter Zhang, vice-president of Aon Hewitt Greater China.

The industries showing the highest pay rise in 2011 will be pharmaceutics at 9.6 percent, machinery at 9.3 percent and consumer goods at 9.1 percent, Zhang said.

One of the most crucial factors behind increasing labor costs in China is that government policies have increasingly favored workers and their rights, in a bid to redistribute and balance social income, according to the report.

"Rising wages will be a fact of life in the Chinese economy for some time to come because the Chinese government supports it, both as a means of avoiding social conflict but also, and equally importantly, as a means of promoting internal consumption and rebalancing the economy," said Auret van Heerden, president of the Fair Labor Association, in an article entitled 2011 China Labor Outlook. Local governments across China responded by raising minimum wages.

A total of 30 provinces, regions and municipalities raised their local minimum wages in 2010 with an average growth rate of 22.8 percent, according to the Ministry of Human Resources and Social Security. However, experts warned that wage increases could be a double-edged sword.

"A hike in wages is an important government initiative intended to improve the living standards of ordinary people, but it may also have negative consequences, especially for small- and medium-sized enterprises with thin profit margins," said Li Shi, director of the Income Distribution and Poverty Research Center at Beijing Normal University.

Nearly three-quarters of Chinese entrepreneurs considered the rising costs of labor as their biggest difficulty in operating their business both at present and in the future, a survey conducted by China Entrepreneurs Survey System showed.

Li Jinlong, general manager of a textile and apparel company based in Guangzhou, said wage increases have directly affected his company's gross margin.

"I have given an average of 20 percent rise in salaries to my company's approximately 230 workers since 2009. To be honest, the rising labor and raw material costs has already squeezed the company's profit margins to only 5 percent. I cannot afford a further wage increase this year," said Li.

Zhang at Aon Hewitt pointed out that an increasing number of companies are expanding their manufacturing footprint across the country's western or central areas to offset the rising labor costs.

"One of the biggest trends we have seen in 2010 was the industrial relocation to the country's interior and western provinces where the pay for workers is lower than those in the eastern coastal cities," he said.

Currently, a skilled worker's annual salary in Xi'an, capital of Northwest China's Shaanxi province, or in Chengdu, capital of Southwest China's Sichuan province, is roughly 20,000 yuan ($3,030). In coastal cities such as Guangzhou it is more than 24,000 yuan, according to 2010 Aon Hewitt's Total Compensation Measurement Study findings.

But in addition to the lower labor costs in the western or central regions, companies have also noticed that there is huge potential for growth in these areas, Zhang added.

The US computer maker Dell Inc announced in September that it will open its second China operations center with manufacturing, sales and services in Chengdu in 2011, in order to supply the booming demand in West China.

Hon Hai Precision Industry Co, the world's largest contract maker of electronics products by revenue, is also planning several major investments in China's interior regions, including Chengdu and Zhengzhou in Henan province and Langfang in Hebei province.

Companies could enjoy the benefits of the government's ongoing efforts to promote the development of western China since the "go-west" campaign implemented in 2000.

In recent years, local governments of the western or central regions have put much effort into attracting investment by implementing preferential tax policies, as well as improving traffic flow by building railways and highways to link inland areas with ports in coastal areas.

As more renowned companies arrive in western or central regions, many college graduates are now opting to choose to stay closer to their homes rather than find jobs in sprawling cities such as Beijing, Shanghai or Guangzhou.

Tang He, a senior at Beijing University of Posts and Telecommunications, said he will go back to his hometown, Chongqing, to work after graduation in June.

"I am majoring in electronic engineering. It has come to my attention that many high-tech companies including US computer maker Hewlett-Packard Co (HP), and Taiwan's Quanta Computer Inc have moved some of their operations to Chongqing,. Therefore, I decided to find a job in my hometown where living costs are much lower than in Beijing," he said.

For some multinational corporations that currently outsource largely to manufacturers in China, in addition to moving to China's interior regions, they are looking at other low-cost countries such as Vietnam, Thailand, Malaysia and Indonesia as alternative sources for global production, according to a recent report from global management consulting company Accenture. However, multinationals considering these locations could face challenges such as less developed infrastructure in ports, roads and facilities, shortages of skilled workers and political instability, said Accenture.

As the Chinese government now attaches great importance to economic restructuring and boosting domestic consumption, it presents significant opportunities for multinationals to transform their focus in China - from manufacturing to sales and distribution in China's domestic markets, it said.

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